Global imbalances and asymmetric returns to US foreign assets: fitting the missing pieces of the US balance of payments puzzle

Abstract

The issue of whether the US earns a persistently higher return on its foreign direct investment (relative to returns to foreign-owned direct investment in the US) has received considerable attention but little closure in the ‘global imbalances’ debate. Measuring the rate of returns to US direct investment abroad and foreign direct investment in the US we find higher returns to US foreign direct investment relative to its foreign counterparts in the US. Given the evidence indicating higher returns to US direct investment overseas, we link the irresolution in the contemporary literature regarding the existence of these returns to the unsettled debate over the origin of global imbalances. Reviewing the macro-financial literature on global imbalances, we find a failure to acknowledge that the US current account deficit is, in part, the outcome of transnational production networks in a global economy under-pinned by dollar hegemony. Given the growth in US multinational supply chains, we argue that the US trade deficit is consistent with asymmetric returns to US direct investment and that the sustainability of these return differentials rests on the stability of the status quo.

Keywords:

• country and industry studies of trade
• FDI
• rate of return
• multinational firms
• current account adjustment

JEL Classifications:

• F14
• F21
• F23
• F32

Acknowledgments

The author thanks Duncan Foley, Anwar Shaikh, the two anonymous referees, and the Editor of this publication for their valuable comments.

Disclosure statement

No potential conflict of interest was reported by the author.

Notes

1. Bureau of Economic Analysis, September 24, News Release, International Investment Position 2013.

2. In absolute not relative terms.

3. About 87% of all global currency transactions are conducted in dollars (Bank for International Settlements 2013).

4. Take, for instance, dollar seignorage: notwithstanding the difficulty of fully accounting for its quantitative contribution to ‘dark matter’, it is probably very small compared with the $3.1 trillion in stock worth of ‘dark matter’ as calculated by Hausmann and Sturzenegger. According to some estimates, at most one-sixth of the three trillion worth of ‘dark matter’ may be accounted for by dollar seignorage.

5. Including Curcuru, Dvorak, and Warnock (2007), Lane and Milesi-Ferretti (2005), and Higgins, Klitgaard, and Tille (2007).

6. The term ‘exorbitant privilege’ was coined by Valéry Giscard d'Estaing in the early 1960s to express French resentment over the American stronghold over the international financial order.

7. Based on their 2007 paper as well as those of other key authors.

8. Such as capital gains or mismeasured flows and stocks.

9. Valuation effects refer to adjustments – such as exchange-rate adjustments, or market valuation – other than those arising purely from financial flows in estimating the ‘direct investment’ stock. These valuation effects, in turn, affect the net international investment position (a country’s stock of foreign assets minus foreign liabilities).

10. We employ methodology and data-sets also used in Ali (forthcoming). However these data-sets are utilized differently. In this article we assess a wide range of profit measures. In Ali (forthcoming), as part of a much wider assessment of the impact of transnational activity on US profits, output, and employment, we only calculate the net average rates of return to USDIA and FDIUS against domestic based production (NIPA).

11. Comparing repatriated earnings on US foreign direct investment overseas against net foreign investment spending by US parent companies from 1982–2010, Desai, Foley, and Hines (2011) find much higher rates of cash-flow surplus generation for the foreign affiliates of US companies compared with their US parent companies.

12. Dooley, Folkerts-Landau and Garber (2004) do not use the term ‘conflicted virtue’ preferring the broader category ‘original sin’ instead. Following McKinnon (2005), we understand ‘conflicted virtue’ as an aspect of ‘original sin’ particular to net creditor peripheral economies. For example, China or Japan cannot use their trade surpluses to lend internationally in their own currencies. If trade surpluses lead to their own currencies appreciating, these countries possibly face debt deflation at home as their (own-currency denominated) domestic liabilities mushroom in value while their dollar-denominated foreign assets depreciate. Even for these creditor economies, virtue (running trade surpluses) comes at a cost.

13. US Bureau of Economic Analysis, US International Transactions Accounts Data, Release Date: December 18, 2012, Table 1. US International Transactions Data.

14. I thank one of the anonymous referees of this publication for raising this point.

¹⁵ ‘Indirect business taxes’ refers to taxes other than income and payroll taxes plus production royalty payments to governments minus subsidies received from governments.

¹⁶ Our investment proxies are ‘capital expenditures’ (USDIA series) and ‘property, plant and equipment expenditures’ (FDIUS series).

Additional information

Funding

This work was supported by a SUNY/United University Professions Dr. Nuala McGann Drescher Leave award.